Proposing Labor

Which Structure?

Which structure is used for proposing Direct Labor depends on the contract type. The Request for Proposal (RFP) should specify the contract type that is contemplated. Contract types require one of two structures.

Any Fixed Price and Cost Reimbursement Award, including:

Firm Fixed Price – Cost Elements
Cost Plus Fixed Fee – Cost Elements
Cost Plus Incentive Fee – Cost Elements
Cost Plus Award Fee – Cost Elements

Other Contract Types, including:

Time & Material – Fully Burdened Labor Rates
Labor Hour – Fully Burdened Labor Rates

If the resulting invoices to the customer will bill for one (or more) fully-burdened labor rate(s), that structure is used in the cost proposal. If the resulting invoices to the customer will bill for individual cost elements (e.g., Direct Labor, Direct Material, Other Direct Costs), that structure is used in the cost proposal. The methodology for proposing, recording, and billing costs must be the same.

If billings will be for one or more fixed price, the proposal and general ledger records use the by-element approach. Among other reasons, a record of historical costs aid in proposing future follow-on contracts.

Step One

Let’s start with the historical cost of just labor. For each labor category proposed, average the actual rate paid. Even if you know which employees will work the proposed Job or project – use the average rate for all employees in the labor category. Suzie Smith might get hit by a truck; you want the option to substitute. By using the average, management can assign any employee in the designated labor category.

Exclude any Key Personnel. (See below.) Exclude the actual rate paid to any employee that works in one (or more) labor category in addition to the proposed labor category. (Their hourly rate is not indicative of just the proposed labor category.)

To fill all requirements for the proposed labor, add (future, potential) employees at the market rate for that labor category. This also applies if the company has no or limited history of salary and wages for that labor category. The entire labor category might have to use other than company history.

To learn the market wage or hourly rate, use documented support. Remember, this is the actual wage or hourly rate paid by the company to the employee in the employee’s (gross pay) paycheck. This does not include any fringe benefits or other compensation. If actual, historical records are not sufficient, project rates for potential new hires. To build and support a proposed hourly pay rate, documentation can include any of the following:

Published research from a staffing firm or professional association
Copies of employment ads for similar positions, with pay information
U.S. Department of Labor reports on wages for the proposed labor category

Structure for Proposing Fully Burdened Labor Rates

Start with the Step One rate. Do not add anything to the rate for direct material, subcontracts, independent contractors, or travel. The “labor” rate is understood (by your GovCon customer) to be employee labor.

After determining the average hourly rate by labor category, apply each applicable indirect rate (a percentage) to each labor category rate (dollars per hour). Whether separately or in combination(s), the indirect rates cover costs related to labor. These include, as applicable:

Employer-paid fringe benefits
Employer-paid payroll taxes
Company administration (Human Resources, Accounting, etc.)
Facilities for the Company
Other allowable expenses of running the business

Applying each indirect rate comprises the cost “burden” in a fully-burdened rate.

Last, apply a profit rate. The end product should be a competitive, market rate – compared to (similar labor categories of) other offerors. One way to verify that the fully-burdened rate is competitive is to check applicable GSA Schedules. The profit can be raised or lowered to improve the relative-competitive position.

If applicable, use a supportable escalation factor on the (total) fully-burdened rate for out-years. The RFP might require pricing for a base year and future/option years. Escalate rates based on the period covered by the actual (historical) labor rates used. For example, if starting with the actual average rates as of the end of the last fiscal year, escalate from December 31 (or the last date of your fiscal year) to the mid-point of the contract base year – then annually.

Structure for Proposing the Labor Cost Element

Start with the Step One rate. If the proposal is for a project that is similar to a past project, actual costs (or actual hours by labor category) can be used as the basis for the proposed project.

If not, the number of hours by labor category comes from technical (not accounting) input. Hours includes time for hands-on work plus travel for the project and other services directly related to the one project or contract. Segregate hours by task, WBS, contract year and other sections as instructed in the RFP.

The actual rate by labor category comes from Step One. For this structure, the proposed Direct Labor may not include anything other than the rates derived from salaries and wages. Do not comingle fringe benefits or other expenses in Direct Labor.

All factors and rates are shown separately, with Direct Labor (hours times rate) for each labor category segregated from those other cost elements.

Key Personnel

Often an RFP designates Key Personnel. These people are listed by name and often require a resume of qualifications for each. Any person that becomes a Key Personnel is contractually required to perform on the contract. Management of the team is no longer at the discretion of the company. In order to remove a Key Personnel (for any reason), the customer must approve the proposed substitute Key Personnel in writing.

Each Key Personnel is proposed separately, based on the salary/wages of that person (alone). Do not use the labor category average for any Key Personnel. Key Personnel are not interchangeable.

Summary

Although calculation of the actual (Step One) rates by labor category uses the same method, presentation differs depending upon contract type. For either structure, remember to consider how the labor will be billed to the customer after the win and award.